LONDON -- I believe Imperial Tobacco is an excellent pick for the savvy income investor, as the company carries an enviable track record of hiking dividends.
Imperial Tobacco has experienced weakness in crucial markets in recent times, but I reckon the strength of its key brands and recently announced cost-cutting measures should help safeguard earnings.
Strategic cost-cutting to defend the bottom line
Imperial Tobacco -- whose flagship brands include Gauloises Blondes, Davidoff, West, and John Player Special -- announced earlier this month plans to become much leaner and efficient.
The company aims to generate 300 million pounds of cost savings per year until Sept. 2018, starting in October. Also, the new strategy will see it "shutter" 150 local brands that make up around 60% of volumes, yet are dropping at an alarming rate of 6% per year.
January's interims showed net revenues crawl just 2% higher in the third quarter, while stick volumes dropped 1% as conditions in key regions such as Europe and Russia continued to deteriorate.
But Imperial Tobacco's ambitious plans to boost efficiency, coupled with ongoing strength among its bellwether products -- net revenue and volumes across its key brands rose 12% and 10%, respectively, in the first quarter -- should continue to deliver dependable earnings growth over the medium term.
Earnings growth to maintain steady momentum
City analysts forecast earnings per share could creep 5% higher to 212 pence in the year ending Sept. 2013, before rising a further 8% to 228 pence in the following 12-month period.
Imperial Tobacco currently trades on a P/E rating of 11.4 for the current year, which is projected to drop to 10.6 in 2014. These ratings compare favorably with a forward multiple of 13.5 for the broader tobacco sector.
Gear up for solid dividend growth
Imperial Tobacco operates a very solid, progressive dividend policy that outstrips that of its rivals. A dividend yield of 4.8% is forecast for 2013, which is expected to leap to 5.3% next year. These yields compare with rival British American Tobacco's 4.2% and 4.6% yields forecast for the next two years.
Imperial Tobacco upped its dividend per share 11% last year to 105.6 pence, and further chunky payout increases are expected this year and next, according to broker estimates, to 115.7 pence and 127.8 pence, respectively.
Shareholder payouts do not enjoy supreme coverage, though, with predicted dividends covered 1.8 times this year and next. But Imperial Tobacco's position in the ultra-defensive tobacco industry should dispel fears over future dividend cuts, in my opinion.
Smoke out other sterling stocks
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The article Should You Buy Imperial Tobacco Group? originally appeared on Fool.com.
Royston Wild does not own shares in Imperial Tobacco Group or British American Tobacco. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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